CPP contribution hikes penalize workers, dampen the economy

The federal government began 2019 by taking a bigger bite out of workers’ paycheques: the combined employer and employee Canada Pension Plan payroll tax rose from 9.9 per cent of earnings to 10.2 per cent.

It’s the first of five annual payroll tax hikes. By the time the CPP tax hike is fully phased in, a worker earning $60,000 will pay $380 more in taxes each year and their employers will pay $380 more.

In addition to paying their portion of the tax, workers will bear part of the cost of the employer portion of the tax hike in the form of lower wages. That’s because when the government raises the cost of employing people, it’s not as profitable for businesses to hire as many workers unless they can reduce wages or slow the rate of future wage increases.

And when the government makes employment more expensive – to both the employer and the employee – the sure result is that there will be fewer jobs. This is particularly bad news for Atlantic Canada, since the region has persistently the highest unemployment rates and the weakest labour markets in the country, to go along with the heaviest overall tax burdens.

The federal payroll tax hike only makes things worse and is exacerbated by other hikes – including carbon and fuel tax increases, and income tax hikes in the form of bracket creep in Nova Scotia and Prince Edward Island, where brackets aren’t indexed to consumer price inflation.

Those who support CPP expansion claim that it helps workers save for retirement. This is false. CPP is not a retirement savings account, and a worker who pays into CPP is not saving for his or her retirement. CPP is simply a transfer of income from workers to people who are retired.

Even supposing – incorrectly – that people saved for their own retirement through CPP, would expanding the program then be justified?

Certainly not, because even then CPP wouldn’t help workers who want to save more. Instead, it impedes these workers by reducing the disposable income they can save through investment decisions that – unlike CPP payments, which are mandatory – they make voluntarily.

Nor should it be any business of the federal government how much workers decide to save. As economist Milton Friedman put it in a 1999 interview: “Why is it that it is appropriate for government to tell me what fraction of my income I should save for my old age? If that’s okay, why can’t it come in and tell me exactly what fraction of my income I have to spend for food, what fraction for housing, what fraction for clothing?”

There are many good reasons why workers might want to save less for retirement than what the government dictates they set aside.

For example, if a worker has a disease that will prevent him from reaching old age and wants to earn as much income as possible today to leave to his family, it doesn’t make sense for the government to tax away his income and tell him that it’s helping him save for retirement.

I’s folly to imagine that federal politicians have greater knowledge of workers’ preferences on how their savings should be invested than workers themselves.

The CPP tax hike, far from enriching Canadians by helping them save more, only shrinks workers’ incomes and makes them worse off.

Matthew Lau is a writer with the Atlantic Institute for Market Studies.